Slides 07

Foundations of Modern Macroeconomics: Chapter 7 1
Foundations of Modern Macroeconomics

B. J. Heijdra & F. van der Ploeg
Chapter 7: A Closer Look at the Labour
Market
Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Ben J. Heijdra
Aims of this lecture

• To discuss some of the most important stylized facts about the labour market
• To demonstrate what the “standard models” are able to explain
• To look for the direction(s) in which we should look for plausible explanations
• NOTE: Every serious student of the labour market(s) should consult the book by
Layard, Nickell, and Jackman (1991), Unemployment: Macroeconomic Performance
and the Labour Market.

Ben J. Heijdra
Some stylized facts

SF1 Unemployment fluctuates over time. See Figures 7.1-7.3
SF2 Unemployment fluctuates more between business cycles than within business
cycles. See Figures 7.4-7.5 for long date series for the UK and the US. There is a lot
of persistence in the data:
Ût = 0.0041 + 0.934Ut−1 , (UK, 1900-1989)

(0.039)
Ût = 0.0080 + 0.877Ut−1 , (US, 1890-1990)

(0.051)
SF3 The rise in European unemployment coincides with an enormous increase of

long-term unemployment. See Tables 7.1-7.2. In Europe the high unemployment
level is not due to an increased probability of losing one’s job but rather to a
decreased probability of finding a job when unemployed!! (see Chapter 9)
Ben J. Heijdra
12 European Community
10
6 United States
0
1967 1973 1979 1985 1991 1997
Figure 7.1: Unemployment in the EC and the US

Ben J. Heijdra
10
Sweden
8
4
Japan
0
1967 1973 1979 1985 1991 1997
Figure 7.2: Unemployment in Japan and Sweden

Ben J. Heijdra
12
10
8 United
Kingdom
6
2 Netherlands
0
1967 1972 1977 1982 1987 1992 1997
Figure 7.3: Unemployment in the UK and The Netherlands

Ben J. Heijdra
16
14
12
10
0
1865 1885 1905 1925 1945 1965 1985
1855 1875 1895 1915 1935 1955 1975 1995
Figure 7.4: Unemployment in the United Kingdom, 1855-1999

Ben J. Heijdra
25.0
20.0
15.0
10.0
5.0
0.0
1900 1920 1940 1960 1980 2000
1890 1910 1930 1950 1970 1990
Figure 7.5: Unemployment in the United States, 1890-1999

Ben J. Heijdra
Table 7.1. The nature of unemployment
Annual Annual Long-term

a a b
Inflows Outflows Unemployment
European Community 1979 0.27 9.8 29.3
1988 0.33 5.0 54.8
United States 1979 2.07 43.5 4.2
1988 1.98 45.7 7.4
Japan 1979 0.31 19.1 16.5
1988 0.37 17.2 20.6
c
Non-EC Europe 1979 0.70 38.1 5.3
1988 0.80 30.4 7.3
Notes:
a: Percentage of source population
b: Percentage of total unemployment
c: Nordic countries only
Source: Bean (1994)

Ben J. Heijdra
Table 7.2. Unemployment duration by country
1990 1979
All Under Over All Under Over
1 year 1 year 1 year 1 year
Belgium 8.7 1.9 6.8 8.2 3.4 4.8

Denmark 9.6 6.8 2.8 6.2 – –
France 8.9 5.4 3.5 5.9 4.1 1.8
Germany 5.0 2.6 2.4 3.2 2.6 0.6
Ireland 14.0 4.8 9.2 7.1 4.8 2.3
Italy 7.9 2.4 5.5 5.2 3.3 1.9
Netherlands 7.6 3.8 3.8 5.4 3.9 1.5
Portugal 5.1 2.5 2.6 4.8 – –
Spain 16.2 6.7 9.5 8.5 6.1 2.4
United Kingdom 6.5 3.6 2.9 5.0 3.8 1.3
Australia 6.8 5.2 1.6 6.2 5.1 1.1
New Zealand 7.6 – – 1.9 – –
Canada 8.1 7.6 0.5 7.4 7.1 0.3
United States 5.5 5.2 0.3 5.8 5.6 0.2
Japan 2.1 1.7 0.4 2.1 1.7 0.4
Austria 3.3 2.9 0.4 1.7 1.5 0.2
Finland 3.4 2.8 0.6 5.9 4.8 1.1
Norway 5.3 4.7 0.6 2.0 1.9 0.1
Sweden 1.6 1.5 0.1 1.7 1.6 0.1
Switzerland 1.8 – – 0.9 – –
Source: Layard, Nickell, and Jackman (1991, p. 6)

Ben J. Heijdra
SF4 In the very long run unemployment shows no trend. Take the time series
representation for unemployment:
α0
Ut = α0 + α1 Ut−1 ⇒ Ū = ,
1 − α1
where Ū is the long-run unemployment rate [6.21% for the UK]. We can derive the
transition speed as follows:
U1 = α 0 + α 1 U0 ,
U2 = α0 + α1 U1 = α0 + α1 [α0 + α1 U0 ]
.. ..
. .
£ ¤
Ut = α 0 1 + α 1 + α21 + ... + αt−1
1 + αt1 U0 ,

Ben J. Heijdra
– we thus find:
£ ¤
Ut − Ū = U0 − Ū αt1 ,
where U0 is the unemployment rate in some base year.
– Experiment: Suppose that the unemployment rate is currently U0 and the

long-run unemployment rate is Ū . How many periods (tH ) does it take, for
example, before half of the difference (U0 − Ū ) is eliminated? We can use tH
(the “half life”) as the indicator for the adjustment speed in the system:
£ ¤ £ ¤ £ ¤
UtH − Ū ≡ U0 − Ū αt1H = 1
2 U0 − Ū ⇒
αt1H = 1
2 ⇒
log 2
tH log α1 = − log 2 ⇒ tH = − .
log α1
– For the UK the half life of the adjustment is 10.15 years!

Ben J. Heijdra
SF5 Unemployment differs a lot between countries. See Table 7.2
SF6 Few unemployed have chosen themselves to become unemployed
SF7 Unemployment differs a lot between age groups, occupations, regions, races and
sexes. See Tables 7.3-7.4
→ So we have quite a lot to explain!!

Ben J. Heijdra
Table 7.3. Sex and age composition of unemployment
Over 25 Under 25
All Men Women Men Women
Belgium 11.0 5.6 15.3 16.0 27.1

Denmark 7.8 5.2 9.4 9.3 11.9
France 10.5 6.4 10.1 19.6 27.9
Germany 6.2 5.1 7.5 6.1 8.5
Greece 7.4 3.8 6.7 15.5 35.1
Ireland 17.5 13.5 18.5 27.2 22.6
Italy 7.9 2.3 6.5 21.0 30.1
Netherlands 9.6 6.8 11.7 14.2 14.3
Portugal 7.0 3.3 5.6 13.1 21.5
Spain 20.1 11.9 16.8 39.9 50.1
United Kingdom 10.2 8.8 8.0 16.9 14.6
Australia 8.0 5.6 6.1 15.0 14.5
New Zealand 4.1 1.9 2.4 6.1 5.5
Canada 8.8 7.0 8.4 14.9 12.5
United States 6.1 4.8 4.8 12.6 11.7
Japan 2.8 2.6 2.4 5.4 5.0
Austria 3.8 3.4 3.7 4.4 4.7
Finland 5.0 5.0 3.8 9.7 8.1
Norway 2.1 1.8 1.5 3.8 3.9
Sweden 1.9 1.4 1.5 4.4 4.0
Switzerland 2.4 – – – –
Source: Layard, Nickell, and Jackman (1991, p. 7)

Ben J. Heijdra
Table 7.4. The skill composition of unemployment
Blue Collar White Collar
Australia 1986 6.6 3.2

1987 6.5 3.3
1992 9.9 4.2
1993 8.9 4.0
Canada 1983 15.9 8.9
1984 14.4 8.7
1991 15.0 7.7
1992 15.6 8.6
1993 15.2 8.6
United Kingdom 1985 9.7 5.3
1986 9.6 5.2
1992 13.2 5.8
1993 13.9 6.3
United States 1983 13.5 6.3
1984 9.8 5.0
1991 9.4 4.7
1992 10.1 5.3
1993 9.0 4.9
Source: OECD (1994, p. 15)

Ben J. Heijdra
Some standard models

A. Can we explain the difference in unemployment of skill
groups?
• Skilled and unskilled labour in the production function:
Y = G(NU , NS , K̄) = G(NU , NS , 1) ≡ F (NU , NS ),

+ +
with FU ≡ ∂F/∂NU > 0, FS ≡ ∂F/∂NS > 0, FU U ≡ ∂ 2 F/∂NU2 < 0, and

FSS ≡ ∂ 2 F/∂NS2 < 0
• Representative firm chooses two types of labour:
max Π ≡ P F (NU , NS ) − WU NU − WS NS ,
{NU ,NS }
where the respective wage rates are WU and WS .

Ben J. Heijdra
• The usual marginal productivity conditions are obtained:

WU
FU (NU , NS ) = ≡ wU
P
WS
FS (NU , NS ) = ≡ wS
P
• With our usual trick we find the demands for the two types of labour:
    
µ ¶
dNS 1 FU U −FSU dwS
 =   
2
dNU FSS FU U − FSU −FSU FSS dwU

Ben J. Heijdra
– we find:
NSD = NSD (wS , wU )

− ?
NUD = NUD (wS , wU )

? −
– If FSU > 0 [skilled and unskilled labour cooperative factors] then cross effects
are positive
• Supply curves of the two types of labour are both assumed to be inelastic:
NSS = N̄S
NUS = N̄U

Ben J. Heijdra
• See Figure 7.6 for a graphical representation. Punchlines:

– with flexible wages, both types are fully employed [equilibrium skill premium,
(wS /wU )∗ ]
– with a binding, skill-independent, minimum wage w̄ the unskilled will experience
unemployment [not unlike Classical unemployment discussed in Chapter 5]. How
to cure it?
∗ abolish minimum wage [incomes distribution problems]
∗ subsidize unskilled work [“Melkert jobs”]
∗ let government hire unskilled workers [“dead end jobs”]
∗ train unskilled workers to become skilled [investment in human capital may pay
for itself]
• So this standard model has sensible predictions.

Ben J. Heijdra
wS wU
S
1 E1
wS !
D -
S NS(wS,w)
!E0
*
wS U
- E1
w
w- ! ! ! B
A D
1
NU(wS,wU)
w*U !
U
E0
D
NS(wS,wU* ) D
NU(w*S,wU)
- -
NS NS NU NU
Figure 7.6: Skilled and Unskilled Labour

Ben J. Heijdra
B. Can changes in the tax system explain the difference in

unemployment [over time and across countries]?
• Single type of labour (as in Chapter 1)
• Short-run (capital constant)
• Representative firm chooses employment (and thus output):
Π ≡ P F (N, K̄) − W (1 + tE )N,
where tE is the payroll tax [a tax on the use of labour levied on employers, e.g.
employer’s contribution to social security]

Ben J. Heijdra
• The first-order condition, FN (N D , K̄) = w(1 + tE ) can be loglinearized:

D
£ ¤
Ñ = −²D w̃ + t̃E ,
w ≡ W/P is the gross real wage, ²D ≡ −FN /(N FN N ) is the absolute value of
the labour demand elasticity, Ñ D ≡ dN D /N D , t̃E ≡ dtE /(1 + tE ), and
w̃ ≡ dw/w
• The representative household chooses consumption and leisure just as in Chapter 1
but faces some extra taxes. The utility function and budget equation are:
U = U (C, 1 − N S ),
P (1 + tC )C = W N S − T (W N S ) ≡ (1 − tA )W N S ,
where T (W N S ) is the tax function and tA ≡ T (W N S )/(W N S ) is the average
tax rate
Ben J. Heijdra
• The tax system is progressive, i.e. the average tax rises with income and the
marginal tax rate is denoted by:
dT (W N S ) 0
tM ≡ = T
d (W N S )
Note: tM is either constant (if T 00 = 0) or increasing (if T 00 > 0).
• The household takes the tax progressivity into account when deciding on
consumption and labour supply. The Lagrangian is:
S
£ S
¤
L ≡ U (C, 1 − N ) + λ (1 − tA )W N − P (1 + tC )C ,
– the first-order conditions:
∂L
= UC − λP (1 + tC ) = 0
∂C · µ ¶¸
∂L S dtA
S
= −U1−N + λW (1 − tA ) − N S
=0
∂N dN
Ben J. Heijdra
– Simplifying the first-order conditions we obtain:
UC U1−N
λ = = ⇒
P (1 + tC ) W (1 − tM )
µ ¶
U1−N 1 − tM
= w (A)
UC 1 + tC
– The marginal rate of substitution between consumption and leisure is affected the
marginal tax rate tM on labour income [not the average tax rate]
– The tax on consumption affects the MRS just as if it was a tax on labour income
• Eq. (A) and the household budget constraint, P (1 + tE )C = (1 − tA )W N S ,

together determine C and N S . In loglinearized form we get for labour supply [see
Ch. 7 for further details]:

Ben J. Heijdra
S S
£ ¤
Ñ = (1 − N ) (σ CM − 1)w̃ − σ CM (t̃M + t̃C ) + t̃A + t̃C
£ ¤ £ ¤
= ²̄SW w̃ − t̃M − t̃C + ²SI t̃A + t̃C − w̃
£ ¤
= ²SW w̃ − t̃C − ²̄SW t̃M + ²SI t̃A ,
where Ñ S ≡ dN S /N S , t̃C ≡ dtC /(1 + tC ), t̃M ≡ dtM /(1 − tM ), and

t̃A ≡ dtA /(1 − tA ). We now have quantitative handles:
(a) ²̄SW ≡ σ CM (1 − N S ) ≥ 0 is the compensated wage elasticity [corresponds to
the substitution effect and is always non-negative]
(b) −²SI ≡ −(1 − N S ) < 0 is the income elasticity [corresponds to the income
effect and is always negative]
(c) ²SW ≡ ²̄SW − ²SI = (σ CM − 1)(1 − N S ) is the uncompensated wage
elasticity [the total effect of a change in the gross wage]. Total effect of a wage
change is positive (zero, negative) if σ CM > 1 (= 1, < 1)
Ben J. Heijdra
• Summary of out labour market model with tax effects:

D
£ ¤
Ñ = −²D w̃ + t̃E (labour demand)
S
£ ¤
Ñ = ²SW w̃ − t̃C − ²̄SW t̃M + ²SI t̃A (labour supply)
we can complete [or “close”] the model in two ways:
(a) Equilibrium interpretation, N = N D = N S , or:
Ñ = Ñ D = Ñ S (flexible wage)
= MIN[N D , N S ] = N D , say because the

(b) Disequilibrium interpretation, N
consumer wage [wC ≡ w(1 − tA )/(1 + tC )] is inflexible

Ben J. Heijdra
(a) Taxes and the labour market: flexible wages

• See Figure 7.7 for the graphical illustration [Table 7.5 contains the analytical results]
• More progressive tax system [t̃M > 0 only]: shifts labour supply to the left [pure
substitution effect], so that w ↑ and N ↓
• Higher average tax rate [t̃A > 0 only]: shifts labour supply to the right [income
effect], so that w ↓ and N ↑
• Higher payroll tax [t̃E > 0 only]: shifts labour demand to the left, so that w ↓ and
(provided ²SW > 0) N ↓ [Try to draw opposite case also!]
• Higher consumption tax: [t̃C > 0 only]: shifts labour supply to the left if ²SW > 0,
so that w ↓ and N ↓ [Try to draw opposite case also!]

Ben J. Heijdra
S S
w N1 N0
E1 S
N2
!
E0
! !
B
D! ! E2
!A
C!
ND
Figure 7.7: Taxes and a Clearing Labour Market

Ben J. Heijdra
Table 7.5. Taxes and the competitive labour market
(a) Flexible wage (b) Fixed consumer wage
w̃ Ñ dU w̃ Ñ dU
²̄SW
t̃M ²SW +²D
− ²²D ²̄SW
+²
0 0 0 -²̄SW
SW D
²SI ²D ²SI
t̃A −² 0 1 −²D ²̄SW + ²D
SW +²D ²SW +²D
²SW
t̃M = t̃A ²SW +²D
− ²²D ²SW
+²
0 1 −²D ²D
SW D
²D
t̃E −² − ²²D ²SW 0 0 −²D ²D
SW +²D SW +²D
²SW
t̃C −² − ²²D ²SW 0 1 −²D ²D
SW +²D SW +²D
w̃C – – – 1 −²D ²SW + ²D

Ben J. Heijdra
(b) Taxes and the labour market: rigid consumer wage

• Suppose that workers have an aversion against reductions in their real consumer
wage, i.e. wC ≡ w(1 − tA )/(1 + tC ), is inflexible downward!
• In loglinearized form we have:
w̃C ≡ w̃ − t̃A − t̃C (A)
• Substituting (A) into the demand and supply functions yields:

D
£ ¤
Ñ = −²D w̃C + t̃A + t̃E + t̃C
S
£ ¤
Ñ = ²SW w̃C + ²̄SW t̃A − t̃M
– we have approximately that the change in the unemployment rate is:
dU = Ñ S − Ñ D
Ben J. Heijdra
S D D
³ S´
– NOTE: U ≡ N N−N
S = 1 − N
NS
≈ log N
ND
so that dU = Ñ S
− Ñ D
.
• Workings of the disequilibrium model are illustrated in Figure 7.8. [Table 7.5
contains the analytical results]. We see that taxes work differently now.
• More progressive tax system [t̃M > 0 only]: shifts labour supply to the left [pure
substitution effect], so that wC and N constant but unemployment down
• Higher average tax rate [t̃A > 0 only]: shifts labour supply to the right [income
effect] and shifts labour demand to the left. Hence, wC constant but N ↓
• Higher payroll tax [t̃E > 0 only]: shifts labour demand to the left; wC constant but
N ↓ (regardless of sign of ²SW )
• Higher consumption tax: [t̃C > 0 only]: shifts labour demand to the left; wC
constant but N ↓ (regardless of sign of ²SW )

Ben J. Heijdra
S
wC S N0
N1
E0 B
-
wC ! ! !A
ND
Figure 7.8: Taxes and a Fixed Consumer Wage

Ben J. Heijdra
Conclusion based on “Standard models”

• Models with flexible wage(s) hard to bring in line with the real world (e.g. empirical
studies suggest that σ CM ≈ 1 to that ²SW ≈ 0: almost vertical uncompensated
labour supply curve).
• The facts suggest that the macroeconomic wage equation is almost horizontal
(even though the microeconomic labour supply is almost vertical). See Figure 7.9
• Hence, we desperately need a theory of real wage rigidity [one of the Holy Grails of
modern macroeconomics]

Ben J. Heijdra
w NS
macro wage
equation
_ ND
Figure 7.9: The Macroeconomic Wage Equation

Ben J. Heijdra
The Theory of Efficiency Wages

• Basic idea: worker productivity depends positively on the wage that he/she receives
• Possible reasons for this effect are:
– link between productivity and nutrition
– labour turnover and training costs
– high wage to attract the best workers
– high wage to limit shirking
– fair wage hypothesis
• The effort exerted by a worker may be S-shaped as in Figure 7.10

Ben J. Heijdra
Ei
B
! Ei=e(Wi,WR)
E0
!
A
!
A B
Wi Wi
*
Wi Wi
Figure 7.10: Efficiency Wages

Ben J. Heijdra
A simple model of efficiency wages

• Effort function:
Ei ≡ e(Wi , WR ), eW > 0, eWR < 0,
+ −
where Ei is the effort of a worker in firm i, Wi is the wage paid by firm i to its
workers, and WR is the reservation wage [the wage that can be obtained elsewhere
in the economy]
• Profit of firm i is defined as:
Πi ≡ Pi AF (Ei Ni ) − Wi Ni , (1)
| {z }
Li
where Pi is the price of firm i, A is a general productivity index, and Li represents

the effective labour units employed in firm i [dimension: bodies × effort per body]

Ben J. Heijdra
• Firm chooses Ni and Wi [the latter to control effort]. First-order conditions:

∂Πi
= Pi AEi FL (Ei Ni ) − Wi = 0 (#)
∂Ni
∂Πi
= Pi ANi FL (Ei Ni )eW (Wi , WR ) − Ni = 0
∂Wi
By combining these conditions we get the Solow condition:
Wi eW (Wi , WR )
=1 (*)
e(Wi , WR )
Hence, the firm picks the wage Wi for which the elasticity of the effort function
equals unity. In terms of Figure 7.10, points A and B are no good but point E0 is just
right
• Once Wi and thus–via the effort function–Ei are known, equation (#) determines
the number of workers, Ni
Ben J. Heijdra
• Major result already: The firm chooses (Wi , Ei , Ni ) but there is no reason to
believe that all firms taken together will demand enough labour to employ all
workers! The wage does not clear the market but instead is a motivating device.
Unemployment will probably exist!!!
• We close the model with an expression for the reservation wage:
WR = (1 − U )W̄ + U B = W̄ [1 − U + βU ] ,
where U is the unemployment rate, W̄ is the average wage paid in the economy,
and β ≡ B/W̄ is the unemployment benefit expressed as a proportion of the
average wage paid in the economy (the so-called replacement rate).

Ben J. Heijdra
• Finally, we adopt a specific effort function to keep things simple:
Ei = (Wi − WR )² , 0 < ² < 1,
where ² measures the strength of the productivity-enhancing effects of high wages,

which we call the leap-frogging effect. For this effort function we can apply the Solow
condition:
Wi ∂Ei
= 1 ⇒
Ei ∂Wi
µ ¶
Wi − WR
= ² ⇔
Wi
WR
Wi = .
1−²
1
Hence, the firm pays a markup 1−ε times the reservation wage!!

Ben J. Heijdra
• But all firms are assumed to be the same so that they all set the same wage so that
Wi = W̄ . This implies:
WR W̄ (1 − U + βU )
Wi = W̄ = = ⇒
1−² 1−²
²
U∗ = .
1−β
Hence, there is indeed a positive equilibrium unemployment as we thought there
would be. U ∗ is higher the higher is ² and the higher is β .
• The intuition can be understood with Figure 7.11
Wi 1 − (1 − β)U
= (RW curve)
W̄ 1−²
Wi
= 1 (EE curve)
W̄
The RW curve slopes down because, as U is high there is a strong threat of
unemployment. This means there is less reason to pay high wages.
Ben J. Heijdra
-
Wi /W
!
E0 E1
! ! EE
RW1
RW0
Figure 7.11: Relative Wages and Unemployment

Ben J. Heijdra
**** Self test ****
Study the effects of taxation on unemployment and wages for the efficiency
wage model. One interesting result is that increasing the progressivity of the tax
system leads to a reduction of the equilibrium unemployment rate! There is less
scope for leap frogging by firms. Wages fall and employment rises.
****

Ben J. Heijdra
Punchlines
• We have stated some stylized facts about the labour market
• Standard models can explain a lot
• There is a tension between micro- and macroeconomic evidence regarding the
labour supply elasticity
• The efficiency wage theory has some very attractive features in removing this tension
• Taxes affect the labour market no matter what theory you use [the direction of the
effects depends on the details]

Ben J. Heijdra

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Foundations of Modern Macroeconomics: Chapter 7 1

Foundations of Modern Macroeconomics

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Aims of this lecture

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Some stylized facts

Ût = 0.0041 + 0.934Ut−1 , (UK, 1900-1989)

Ût = 0.0080 + 0.877Ut−1 , (US, 1890-1990)

SF3 The rise in European unemployment coincides with an enormous increase of

Figure 7.1: Unemployment in the EC and the US

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Figure 7.2: Unemployment in Japan and Sweden

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Figure 7.3: Unemployment in the UK and The Netherlands

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Figure 7.4: Unemployment in the United Kingdom, 1855-1999

Figure 7.5: Unemployment in the United States, 1890-1999

Table 7.1. The nature of unemployment

Annual Annual Long-term

European Community 1979 0.27 9.8 29.3

1988 0.33 5.0 54.8

United States 1979 2.07 43.5 4.2

1988 1.98 45.7 7.4

Japan 1979 0.31 19.1 16.5

1988 0.37 17.2 20.6

1988 0.80 30.4 7.3

a: Percentage of source population

b: Percentage of total unemployment

c: Nordic countries only

Source: Bean (1994)

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Table 7.2. Unemployment duration by country

All Under Over All Under Over

1 year 1 year 1 year 1 year

Belgium 8.7 1.9 6.8 8.2 3.4 4.8

Source: Layard, Nickell, and Jackman (1991, p. 6)

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

– Experiment: Suppose that the unemployment rate is currently U0 and the

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

SF5 Unemployment differs a lot between countries. See Table 7.2

SF6 Few unemployed have chosen themselves to become unemployed

→ So we have quite a lot to explain!!

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Table 7.3. Sex and age composition of unemployment

All Men Women Men Women

Belgium 11.0 5.6 15.3 16.0 27.1

Source: Layard, Nickell, and Jackman (1991, p. 7)

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Table 7.4. The skill composition of unemployment

Blue Collar White Collar

Australia 1986 6.6 3.2

Source: OECD (1994, p. 15)

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

Some standard models

Y = G(NU , NS , K̄) = G(NU , NS , 1) ≡ F (NU , NS ),

with FU ≡ ∂F/∂NU > 0, FS ≡ ∂F/∂NS > 0, FU U ≡ ∂ 2 F/∂NU2 < 0, and

where the respective wage rates are WU and WS .

• The usual marginal productivity conditions are obtained:

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

NSD = NSD (wS , wU )

NUD = NUD (wS , wU )

Foundations of Modern Macroeconomics – Chapter 7 Version 1.01 – May 2004

• See Figure 7.6 for a graphical representation. Punchlines:

Self test